Thursday, October 12, 2006

Levi Strauss and Co. Q3 '06 Results: Not Exactly Sexy

[Mena Suvari and Carmen Electra sport Levi's jeans; NY Post]

Buzz alone doesn't always bring home the bacon. This is the case with Levi Strauss & Co. who received some positive media coverage around town lately (see NY Post's Levi's Revival). While no one held his breath some did expected Q3 '06 to look better for them.

At this time I would like to evoke James Sullivan (Jeans: A Cultural History of an American Icon):

The venerable San Francisco clothier would remain fiercely committed to its core product, resisting innovations as fleeting fads. The behemoth of the industry gradually developed an unfortunate reputation as the garment world's Johnny-come-lately. Ideally suited for the momentary return to basics of the late 1980s, it was reluctant to acknowledge the baggy jeans phenomenon of the early 1900s. And it was slow to respond once again when low-rise would dominate the racks a few years later. Though still the world's largest purveyor of blue jeans, Levi's has tumbled from a record-high sales volume of $7 billion in 1996 to just over $4 billion in 2004.

I think things are starting to pick up. Q3 doesn't exactly look bad and the negative drivers seem to spring mostly from the decline of the Levi Strauss Signature brand. They already have plans to pull that out of Europe, where apparently crap jeans aren't tolerated.

Their LVC (Levi's Vintage Clothing) and Capital E are getting great feedback. And given their size nobody can say they were slow to react to the skinny jeans trend (which is tapering off, according to some).

But with CEO Philip A. Marineau retiring and R. John Anderson (current exec VP/ COO) taking over I hope to see some interesting changes. A company with such a rich history shouldn't become another fallen giant.

Oh and go buy James Sullivan's book if you haven't already (link below).

LS&C's financial results announcement:

Net revenues for the third quarter were $1,023 million compared to $1,037 million for the same quarter in 2005, an approximately 1 percent decrease on a reported basis and a 2 percent decrease on a constant-currency basis. The change in net revenue primarily reflects lower U.S. Levi Strauss Signature and Asia Pacific sales, partially offset by increased U.S. Dockers sales.

Net income for the third quarter increased 29 percent to $49 million compared to $38 million in the same quarter of 2005. The improvement reflects a 14 percent increase in operating income, primarily driven by a $29 million benefit-plan curtailment gain related to the planned closure of a U.S. distribution center, partially offset by higher income tax expense.

"We improved our profitability and cash flow - our primary objective this year," said Phil Marineau, chief executive officer. "We're addressing a number of challenges to our business, including fixture reductions at U.S. Wal-Mart stores and a sales decline in Japan. However, in the face of retailer consolidation in the United States and the challenging European market, I'm pleased with the U.S. Levi's and Dockers performance and the improving trends in Europe."

Third-Quarter 2006 Results

Gross profit decreased 1 percent to $467 million compared to $472 million in the third quarter of 2005. Gross margin was stable at 45.7 percent of revenues for the third quarter of 2006 compared to 45.5 percent of revenues in the same period last year.

Selling, general and administrative expenses decreased 6 percent or $21 million to $307 million in the third quarter of 2006 from $327 million in same period of 2005. Lower SG&A expenses in the 2006 period were primarily attributable to the curtailment gain and lower advertising and promotion costs, partially offset by the $8 million compensation and $5 million non-cash pension costs related to the retirement of the company's CEO and higher selling expense associated with opening new company-operated retail stores in Europe and the United States.

Operating income for the third quarter of 2006 increased $19 million to $158 million compared to $139 million in prior year period. The increase was primarily due to lower SG&A, partially offset by lower net revenue.

Interest expense for the quarter decreased 6 percent to $60 million compared to $64 million in the third quarter of 2005. The decrease was primarily attributable to lower average interest rates during the 2006 quarter.

Income tax expense for the third quarter of 2006 was $58 million compared to $40 million in the 2005 period. The increase is primarily driven by the increase in income before taxes in the current period compared to the prior year. The effective tax rate for the first nine months of 2006 was 39 percent compared to 47 percent for the same period in 2005.

Strong year-to-date cash flow in 2006 is attributable to improved working capital management and lower interest and restructuring payments.

"We delivered solid operating income, even as we invested in our business," said Hans Ploos van Amstel, chief financial officer. "Better working capital management and cost discipline helped contribute to our bottom line. We expect to see stable revenues in the fourth quarter."

Levi Strauss & Co. SEC Filings

Jeans: A Cultural History of an American Icon


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